The Trans Pacific Partnership – corporate dream or vehicle for growth Remarks by Stephen Jacobi to the Auckland branch of the New Zealand Institute for International Affairs, Auckland, 20 August 2012 NZIBF – 20 August 2012

It’s a pleasure to be with you this evening and to be speaking in a place I know only too well, having studied at this great University far too long ago.

I am tempted on occasions like this to preface my remarks with a health warning.

The Trans Pacific Partnership, or TPP, now under negotiation between eleven economies, seems to strike fear into the hearts of many, while lighting up the eyes of others.

There is no doubt that there is a lively and growing debate about TPP here in New Zealand – that’s as it should be because – and the skeptics are quite right about this ? TPP is not your general run-of-the-mill free trade agreement: TPP has the capacity to drill down much more deeply into domestic policy than other agreements and as such needs the scrutiny of a range of stakeholders.

Notice if you will that I am saying TPP, not TPPA, there is no “A” as yet, as this is still a negotiation, not a done deal.

TPP remains a work in progress and it is ambitious and complex to boot, and even business advocates like me have to suspend our judgment about the final result until negotiators have completed their work and we can see the fruits of their endeavours.

Tonight I’d like to talk to you about the potential of TPP, if successfully concluded, to transform the way business is done in the Asia Pacific region and to build growth and jobs.

I do so from the perspective of the NZ US Council, a non-partisan organization funded by both business and government in New Zealand and aimed primarily at strengthening New Zealand’s relationship with the United States, which is just one of the eleven members of the Partnership.

I am speaking also on behalf of the NZ International Business Forum which brings together the leaders of New Zealand’s largest internationally oriented companies and leading business organizations.

I’m going to talk first about the context in which TPP is being negotiated, about the progress in negotiations thus far and about just two of the more controversial aspects of the negotiation ? that is to say, intellectual property and foreign investment.

The context

This University has a vocation to prepare its students for future careers in a dynamic and changing Asia Pacific region, the health and future of which will be under the spotlight as Leaders, Ministers, officials and business people gather in Vladivostok in a few weeks time for the annual APEC Summit.

The Summit includes both an inter-governmental meeting hosted by President Putin as this year’s APEC Chair involving the Leaders of APEC’s 21 economies, although, we understand not this year President Obama who is already in campaign mode.

There will also be gatherings of business leaders from around the region at the fourth and final meeting for 2012 of the APEC Business Advisory Council (ABAC) on which I serve as Alternate Member for New Zealand, and at the annual APEC CEO Summit which will be attended by several New Zealand CEOs.

Amongst the many issues which will be under discussion at Vladivostok two will stand out ? first, the state of the global economy and how APEC can drive greater growth and job creation; and second, how business itself is changing and how the economic and regulatory frameworks in the region also need also to change to ensure business can play a full part in global recovery.

Now there’s no hiding the fact that while the global economy has successfully withdrawn from the brink of a financial crisis, a number of significant risks remain not the least ongoing instability in the Eurozone, a sluggish recovery at best in the United States, and some slowing growth, albeit from a very high base, in China.

The APEC economies have out-performed the rest of the world in recent years ? even so growth dipped from 5.9 percent in 2010 to 4.1 percent in 2011 largely because the European financial situation impacted negatively on trade and investment with Asia.

The good news is that this year growth in APEC is expected to climb to 4.3 percent and to 4.7 percent in 2013, and that’s particularly good news for New Zealand since over 70 percent of our exports go to APEC economies.

The not-so-good news is that persisting financial uncertainty, stubborn government deficits, continuing restrained spending by global consumers all translate into a sense of global unease which is generally bad for business.

Reflecting this unease the WTO is already predicting that world trade growth will slow to 3.7 percent this year, well below the twenty year average of 5.4 percent.

The APEC Summit in Vladivostok will need to focus on how to lock in the recovery already underway, how to mitigate the downside risks and build the basis for expanding growth in the future.

The reason growth features so prominently in the discussion is that it is growth which ultimately drives business confidence, investment and job creation.

Jobs are created when businesses take risks and invest their money to make a return.

Investment happens when the environment is right, when the rules are clear and there is a degree of certainty about the future ? the more uncertainty there is, and the harder the investment process, the less investment and fewer jobs there will be.

New Zealanders more than any others around the region know that our country’s economic success is driven by returns from overseas markets.

To put it very simply “we can’t eat all we produce and we can’t produce all we need”.

Or another way, “it takes a lot of kiwifruit to pay for a Boeing”.

Or even, as the Government said in a report on Building Export Markets issued last week, “we can’t get rich by selling to ourselves”.

According to BusinessNZ, two out of three jobs depend in some way on trade and investment.

Export income, capital inflows through foreign direct investment and the remittance of dividends from New Zealand’s offshore investments ? these are what plug the gap in domestic spending and government deficits.

Ultimately therefore the path to more and higher paying jobs, more hip operations, a world class education system and better infrastructure can only be found through greater integration in global markets.

That’s why in its Business Growth Agenda the Government is targeting an increase in the ratio of exports to GDP to 40 percent.

That’s why moves within APEC to expand trade and business are directly relevant to New Zealand’s future and why we must be involved at every level including in the context of TPP, to eliminate trade barriers, reduce costs and make it easier to do business around the region.

When it comes to the way in which business is done, we also see significant change underway.

Increasingly exports are not coming from one country alone but are “made in the world” ? more than half the world’s trade in manufactured goods is represented by what are called “intermediate goods” ? goods that require further finishing and manufacture before re-export.

This reflects the advent of the global supply and value chain.

Supply chains now link supply to demand the world over.

This is increasingly how business is transacted. This is how businesses are meeting customer demands.

New Zealand companies participate actively in these supply chains whether as farmers, fishers or fruit producers supplying safe, sustainable food into supermarkets or food processing operations; foresters supplying sustainably harvested wood for manufacturing or re-manufacturing; manufacturers supplying design or componentry; software producers linking into wider operating systems.

Companies like Fonterra, Anzco, Sealord, Zespri, Pan Pac, Fisher & Paykel Appliances, Fisher & Paykel Helathcare, Orion Health are all operating in this way developing strategic partnerships, building stronger links with offshore customers and some of them investing in distribution or offshore manufacturing,

What is noticeably different about these business processes today is that they are increasingly spread over different locations and jurisdictions.

Whereas processing operations once happened in country A or B, today they might happen in country C, D or E before finally getting to the consumer in country F.

This gives rise not only to significant complexity in management but also to a number of barriers and chokepoints along the way which can add further complexity, cost and wastage.

Making it easier to do business requires serious attention to issues that impact on business operations and affect the cost and time in which business can be done.

It is well known that a one day delay in exports can lead to a loss in export value of 1%.

The World Bank has identified that improving trade-related transparency in the region could increase trade by 7.5 percent or $148 billion.

To help address these issues, in recent years all the APEC economies have been negotiating free trade agreements mostly on a one-to-one basis.

New Zealand has been an enthusiastic participant in this process.

What we see today across the region is a patch-work of agreements which present a number of benefits for exporters particularly in terms of market access but risk also presenting a confusing picture for businesses operating supply chains across multiple locations across the region ? a noodle bowl of truly epic proportions!

So today we are confronted with a triple challenge:

? the challenge of expanding economic growth, improving business confidence and increasing trade and investment

? the challenge of making supply chains work better, faster and more economically

? the challenge of ensuring that this new supply chain friendly agenda is reflected in a new generation of trade and economic agreements.

Significance of TPP

This is where TPP comes in.

TPP provides one opportunity to meet these challenges.

TPP is an important first step towards untangling those noodles, to adopt a common approach to addressing the main barriers and chokepoints ? in short to adopt a seamless economic space around the region.

TPP is one of the identified pathways to the ultimate goal of regional economic integration encapsulated in the concept of a Free Trade Area of the Asia Pacific (FTAAP) which has been endorsed by APEC Economic Leaders.

TPP is not the only such pathway nor may it yet prove the best but it is certainly the most advanced.

TPP is not a new idea ? its origins go back to the early 1990s and the end of the Uruguay Round.

When it looked uncertain that the Uruguay Round might be completed (does this sound familiar …) the idea arose to see if would be possible to link the more open economies within APEC.

Eventually the Uruguay Round was concluded and the WTO was born but New Zealand and Singapore persisted with this idea, concluding a bilateral free trade agreement and then Brunei and Chile joined in the first manifestation of TPP which is an existing agreement between the four members.

In 2008 it proved possible to convince the Bush Administration to seek to join the existing agreement and this was confirmed after a short delay by the incoming Obama Administration.

As the WTO’s Doha Development Agenda continued to drag, others in APEC were attracted to the idea and today there are eleven participants ? Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, Viet Nam and the United States.

Canada and Mexico are the newest members ? they will only formally join the negotiating process later in the year once domestic approval processes are completed in the United States where a 90 day consultation period is required with the Congress.

Some of these participants already have FTAs with each other, such as the NAFTA members (Canada, Mexico, USA) or Australia and the United States.

Each of the eleven can be expected to have different aims and objectives but all ? in theory at least ? have subscribed to the overall vision of TPP as an ambitious, high quality and comprehensive agreement.

This was expressly agreed by TPP Leaders meeting at APEC in Honolulu last year when they released the broad outlines of the future agreement.

Some thirteen negotiating rounds have been held to date, with the next round scheduled for Leesburg, Virginia, next month.

The negotiation is taking place across twenty five or so “chapters” reflecting the range of issues under discussion and covering all aspects of the commercial relationship between the participants.

This includes the more traditional issues of market access for goods and services, commitments relating to foreign investment and competition, undertakings on labour and the environment and a range of so-called “new generation” issues which are of particular relevance to small and medium size business and to the health of regional supply chains.

Of particular interest is what is called the “regulatory coherence” agenda ? not an attempt to reduce regulation but to improve the way regulations are made and implemented and to promote co-operation between regulators.

Much of this work draws on learnings from New Zealand’s experience with CER with Australia and the operation of the Trans Tasman Mutual Recognition Agreement as well as understandings reached in the context of the NZ/China FTA.

While the aim is not “one size fits all” when it comes to regulation it is obvious that greater alignment of regulatory practice across the region could serve to improve regulatory outcomes for both consumers and business, reduce costs and make it easier and faster to do business.

In Honolulu President Obama announced that it was hoped the negotiation could be completed in 2012 ? as the number of participants expands, and the pressure of a US Presidential campaign is brought to bear, this now seems unlikely.

Some indication of progress may be available in Vladivostok ? in any event a further negotiating round has been scheduled for December.

Business interests like the NZ US Council and our allies in other TPP economies would like to see the negotiation concluded as soon as possible in 2013 but we realise that substance needs to drive the negotiating agenda.

For New Zealand of course “substance” means not only the new agenda I have just been talking about but also the full inclusion of agriculture, especially dairy and beef in the final agreement.

This is certainly implied by the description of TPP as a comprehensive agreement but thus far at least the United States has been slow to engage on a substantive discussion on agriculture or at least one that would satisfy Trade Minister Groser.

The significance of the agriculture issue ? or sugar for Australia, or textiles for Viet Nam ? is that the United States cannot expect others to proceed to engage on issues of interest to itself unless it engages fully on the market access issue.

That’s the beauty of a plurilateral negotiation of eleven members ? the ability of one member, even a large member like the United States, is somewhat less than it might be in a simple two ?way negotiation, as Australia found to its detriment when it concluded its FTA in 2004 and sugar was completely excluded.

That’s also worth remembering when from time to time we see leaks from the negotiating process ? everything the United States or any other participant tables may not be achieved.

This is also why TPP is taking time to deliver ? the fact of the matter this is a complex undertaking that needs for all our sakes to be got right.

Even so there is now a considerable momentum behind the negotiation.

There is a high degree of attention focused on the negotiation by governments, business and other stakeholders.

Other potential members are waiting in the wings ? the most notable is Japan which under Prime Minister Noda continues a difficult period of consultation both internally and externally about future membership.

Even China is watching the negotiation with interest which is important because while TPP can be concluded amongst the eleven it will need China and all 21 member economies of APEC to be a pathway to a broader agreement.

In the United States, since the ratification last year of three FTAs by Congress, TPP is not just the Administration’s priority trade liberalisation initiative; it is the only one and directly aimed at giving the United States a direct stake in the success of the region.

The gains for growth and jobs from a successful conclusion to the negotiations are substantial ? independent and credible economic modelling suggests for New Zealand alone an indicative figure of NZ$2.1 billion economic gains by 2025, or growth of just under 1 percent of GDP.

These potential gains are simply too big to be left on the table.

Negotiating challenges

At the same time it must be acknowledged also that there is plenty of concern about what TPP might or might not contain.

It is true that the TPP negotiations are conducted in private, which is a source of criticism from some quarters who would like greater transparency ? this is because there are sensitive economic and commercial issues under negotiation and a more open process would inevitably lead to sectoral interests seeking to undermine the negotiation as has been the case for example in the WTO or the Kyoto Protocol.

Some concerns arise because the entire notion of such agreements is contested.

Others arise because some interests could conceivably be affected negatively by provisions in the final agreement.

It’s not possible for me to address all of these concerns this evening, but I would like to deal with two of them at least briefly.

The first of these relates to the inclusion of intellectual property provisions in the ambit of the negotiation.

We are talking here largely about laws and regulations relating to patents, copyright, some pharmaceutical issues and the use of the Internet.

From what we understand the United States is generally pushing for higher standards of intellectual property protection ? that is to say longer patent and copyright terms, the extension of patents to software, more rights for pharmaceutical rights holders and tougher penalties for illegal file sharing and downloading.

The New Zealand Government faces a very difficult balancing act in this aspect of the negotiation.

On the one hand a higher level of protection could benefit the creators of intellectual property such as the movie or music industry or those companies which are producing extensively for overseas markets.

On the other hand higher levels of protection might serve to limit innovation especially in the software industry where new developments tend to be built very quickly on the top of earlier applications.

Higher levels of protection could also impact on New Zealanders’ access to information and literary works especially through the Internet.

Some key points need to be borne in mind.

The first, as I just mentioned, is that not all the United States wants will prove to be acceptable to the other parties.

The second point is that the New Zealand Government and its negotiators are well aware the risks arising from this negotiation for New Zealand’s current intellectual property regime.

The third point is that the vigorous discussion of these issues we see at present here in New Zealand is taking place in all the other TPP economies including the United States.

The fourth point is that as in any negotiation the most likely outcome will be a compromise acceptable to all parties.

This does not mean that those with interests in the outcome on intellectual property shouldn’t make their views known ? clearly they should ? but this does suggest an approach of “keep calm, and carry on”: in other words the negotiation should be left to run its course while New Zealand negotiators continue to pay close attention to potential fish-hooks.

Another contentious issue relates to investment and to the provision whereby foreign investors might be able to seek binding arbitration in disputes with the host government.

Such provisions are nothing new ? they exist already in the NZ/China FTA and the ASEAN-Australia-NZ FTA.

These provisions specifically recognise the government’s ability to regulate in the national interest to protect the environment and public health and in New Zealand’s case to uphold the Treaty of Waitangi.

The public health provision deals with the issue of plain paper packaging for tobacco on which TPP has very little bearing especially given that TPP is not yet concluded much less entered into force.

Furthermore these provisions seek to limit the areas in which foreign investors can seek redress ? it is not simply a matter of policies or regulations they don’t like, but rather actions which are contrary to specific agreements or which constitute the expropriation of assets.

An example of this is the recent decision of the Argentinian Government to nationalise the assets of the Spanish owned energy company Repsol.

Even then the provisions do not prevent such actions being taken, they simply would require any government actions found to be in breach to be addressed by compensation.

Compulsory arbitration is not an alien concept even within the New Zealand legal system and in this case the arbitration would be carried out by a specialist international tribunal established within the UN system.

There is the criticism that such actions restrict national sovereignty yet in this respect a trade agreement is no different from any international treaty like the Kyoto Protocol or the international labour conventions.

As Trade Minister Groser said recently “The entire purpose of internationally legally binding agreements is to limit sovereignty on a reciprocal and agreed basis .”

Trade agreements actually serve to uphold sovereignty ? by putting in place a system of rules which prevent larger and more powerful countries from taking actions which harm our interests.

This is the context in which investor/state provisions need to be seen.

New Zealand needs foreign investment and New Zealand investors offshore need this sort of protection to prevent their assets from being expropriated by governments which may not necessarily have the same sorts of legislative and regulatory processes we have here in New Zealand.

While at any time it is always open for corporations whether domestic or foreign to take actions against the New Zealand Government, the likelihood of such actions being successful in a TPP context seems rather small.

Conclusion

TPP is most definitely not your general run-of-the-mill trade agreement.

TPP is a bold undertaking.

It is an initiative that seeks to respond both to the need for stronger and more sustainable growth in the Asia Pacific region, and to reflect the new ways in which business is being done.

TPP is moreover a work in progress.

Nothing will be agreed until everything is agreed and the final decision on whether to conclude, sign and ratify will be up to governments and their respective treaty making processes.

Success is not guaranteed ? much will depend on the negotiating process and the extent to which negotiators are kept appraised of the interests and views of stakeholders including business and civil society.

Public debate around TPP issues is a welcome and indeed necessary part of this process.

Trade negotiations may raise blood pressure but they need not altogether be bad for health.

Trade negotiations are not just corporate dreams ? they are the art of the possible.

High quality and forward-looking agreements like TPP are necessary for business to play its part in building a stronger and more resilient global economy on which New Zealand’s economic livelihood relies.